What Bust? Australia Set for Huge Boom, Report Says

Australia's economy has been clouded with negative forecasts in recent weeks with some even warning of a dip back into recession, but a recent report argues the economy is poised for a rapid acceleration in the coming months.

According to Clifford Bennett, chief economist of the financial services firm White Crane Group, which publishes the White Crane Report, Australia is set for a major domestic boom next year with gross domestic product growth estimated at 4.5 percent – levels not seen since before the financial crisis – supported by a big wave of investment expected after the Federal election in September.

"We were one of the first to warn of this slowdown in the domestic economy some two to three years ago, and it appears we are now among the first to recognize there will be a major domestic economic boom next year, as well as an on-going resources boom," he said.

Australia's economy has held up relatively well since the financial crisis but in recent times, some economists have turned bearish on its prospects. An excessively strong domestic currency, speculation over a peak in mining investment and a slowdown in demand from major trading partner China, have all raised concerns.

As a result, major investment banks including Bank of America Merrill Lynch and Goldman Sachs have recently moved to downgrade their forecasts for Australian growth next year, to 2.4 percent from 2.9 percent, and to 1.9 percent from 2.7 percent, respectively.

But Bennett is adamant the more negative forecasters have falsely interpreted the end of the mining boom and are under-estimating the positive impact that the Federal election outcome on September 14 will bring.

The hotly contested election could give victory to the opposition - the Liberal/National Coalition party led by Tony Abbott - and see the exit of the current ruling Labor party led by Prime Minister Julia Gillard, which has fallen out of favor especially with business voters due to the deeply unpopular and controversial mining tax introduced in recent years.

According to Bennett, many are holding back on investment pending the outcome of the election.

"They [other economists] really do not seem to get that the resources boom is not over, and the Australian businesses are hording cash waiting to invest on a Coalition win," said Bennett.

"We are further encouraged that the Australian economy will accelerate sharply within months. This will be a rare acceleration historically," said Bennett.

Other analysts, however, were not as convinced of such a rapid acceleration and kept to their substantially lower growth projections.

"Four and a half percent is a slightly over zealous," said Matthew Circosta, economist at Moody's Analytics. "I agree that the resources boom does still have a way to go, but it is past its peak and the pace of mining investment is definitely slowing," he said. He expects the economy to grow around 3 percent in 2014.

According to Circosta, achieving such a high level of growth would require a strong pick-up in the non-mining sectors, in order to rebalance the slowdown in mining. The Australian government has already cut interest rates by 200 basis points since late 2011 in attempt to stimulate the domestic economy, but the impacts are yet to be fully felt.

Tony Farnham, economist at Patersons Securities, said a growth rate of around 2.5 percent was more likely.

"For that level of growth to be achieved [4.5 percent] we would need to see a massive increase in household spending, together with commodity prices holding up well. I'm not convinced of either of those two scenarios," he said. "I think it was always a bit naïve to the RBA's rate cuts would take immediate effect, it's really all about the degree of confidence," he added.

But both Paterson's Farnham and Moody's Circosta acknowledged that the election could provide a positive boost to the Australian economy.

"There's certainly a degree of uncertainty over the current political situation," said Farnham. "The fact that we've had a minority government for the past few years means certainty is what we have lacked. If we were to get a government with a clear majority - that would certainly be helpful for Australian businesses."

"Businesses are disenfranchised with the current state of play, particularly in Western Australia where it has held back business confidence," added Circosta.